Opinion
Docket No. 2505.
1944-08-15
VIVIAN B. ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Arthur Garfield Hays, Esq., James R. Cherry, Esq., and Julian G. Culver, Esq., for the petitioner. William F. Evans, Esq., for the respondent.
1. In 1933, 1935, and 1941 petitioner made gifts in trust for the benefit of her granddaughter. The income of the trusts during the donee's minority was either to be used for her maintenance and support or accumulated, at the discretion of her parents or the trustees. After attaining her majority the donee was to receive the income for life and after attaining the age of 35 years could also withdraw the principal. If the donee should die before attaining the age of 21, leaving no children, the principal was to go to her mother if living, otherwise to the mother's heirs. Held, that the gifts in 1933 and 1935 were gifts or future interests; held, further, that the value of each of the gifts was the book value of the property transferred to the trusts at the time of such transfers.
2. The value for gift tax purposes of a block of 10,000 shares of stock out of a total of approximately 3,500,000 of such shares issued and outstanding, held to be the median of the high and low prices at which 1,500 of such shares were sold on the stock exchange on the day the gift was made. Arthur Garfield Hays, Esq., James R. Cherry, Esq., and Julian G. Culver, Esq., for the petitioner. William F. Evans, Esq., for the respondent.
This proceeding involves a gift tax deficiency of $7,136.24 for 1941. The questions in issue are (1) whether certain gifts in trust made in the prior years 1933 and 1935 were gifts of future interests, and (2) the value of certain shares of stock transferred to one of the trusts in 1941. Some of the facts have been stipulated.
FINDINGS OF FACT.
Petitioner is a resident of New York, New York. She filed her gift tax return for 1941 with the collector of internal revenue for the third district of New York.
On December 23, 1933, petitioner transferred to her daughter, Josephine A. Winter, 3,500 shares of stock of May Department Stores Co. in trust for Josephine Clark Winter, granddaughter of the donor and daughter of the trustee. The donee was an infant, one year of age. The agreement provided that the trustee was:
FIRST: To invest and reinvest the same, to receive the income therefrom and to pay the net income to JOSEPHINE CLARK WINTER, grand-daughter of the Grantor (hereinafter called ‘Grand-daughter‘), monthly during her lifetime. So long as the said Grand-daughter shall be a minor, the Trustee or Trustees shall apply the net income from the Trust Fund for her use to the extent required for her education and support, as directed by the said JOSEPHINE A. WINTER, daughter of the Grantor, or after the death of the said daughter as directed by L. CLARK WINTER, father of the said Grand-daughter, or after his death in the absolute discretion of the Trustee or Trustees and they shall accumulate any surplus income until the said Grand-daughter shall attain the age of twenty-one years, at which time such surplus shall be paid to her absolutely. * * *
After the granddaughter should attain the age of 21 years the net income of the trust was to be paid to her monthly during her life. If she should die during her minority, leaving children surviving her, the principal was to be divided in equal shares among such children, but, if no children, it was to be distributed to her mother, Josephine A. Winter, if living, or, if deceased, to her descendants. In the event of the granddaughter's death after attaining 21 years of age, the principal was to be distributed as directed by her in her will. In the absence of such appointment, it was to be distributed to her living descendants. It was further provided that the trust might be terminated at the pleasure of the granddaughter after she attained the age of 35 years and her portion of the principal of the trust then distributed to her.
Petitioner filed a gift tax return for 1933 in which she reported a gift of the 3,500 shares of stock at a valuation of $98,218.75. In computing the net taxable gift she claimed the statutory exclusion of $5,000.
On June 28, 1935, petitioner transferred 10,000 shares of the common stock of Commercial Investment Trust Corporation to Josephine A. Winter and the Chase National Bank of the City of New York as trustees in trust for the same granddaughter, Josephine Clark Winter. The trustees were directed:
* * * subject to the provisions hereinafter contained for a division of the trust into shares or parts for the benefit of children born to JOSEPHINE A. WINTER, the daughter of the Grantor, subsequent to the execution of this trust, to apply the income to the support, education and maintenance of JOSEPHINE CLARK WINTER, the grand-daughter of the Grantor (hereinafter called ‘grand-daughter‘), insofar as the same may be required in the sole discretion of the Trustees, and to accumulate any surplus income until the said grand-daughter shall attain the age of twenty-one (21) years, at which time such surplus income shall be paid to said grand-daughter absolutely and thereafter to pay the income from the trust fund to the grand-daughter monthly during her lifetime. * * *
This trust agreement further provided, as did the 1933 trust agreement, that if the granddaughter should die before attaining the age of 21, leaving surviving children, the principal was to be paid in equal shares to such children, but in case there were no surviving children it should be paid to Josephine A. Winter or her descendants. In the case of the granddaughter's death after attaining the age of 21, the principal was to be disposed of as directed in her will or, in the absence of such appointment, distributed to her descendants. The granddaughter was given the further right to have the principal of the trust distributed to her at any time after attaining the age of 40. There was a further provision in this trust agreement that the trust was to be kept open for any after-born children of Josephine A. Winter and that all such children were to share equally in the trust fund. As in the 1933 trust, the trustees were authorized to apply the income to the support, education, and maintenance of such children. Any surplus income was to be accumulated and distributed to them when they attained the age of 21. Thereafter, the income was to be paid to them monthly for life. The principal was to be disposed of as in the case of the 1933 trust.
Petitioner filed a gift tax return for 1935 in which she reported the gift of 10,000 shares of Commercial Investment Trust Corporation stock at a valuation of $670,000. She claimed the statutory exclusion of $5,000 in her gift tax return for that year.
On August 5, 1941, petitioner transferred to the June 28, 1935, trust for the benefit of her granddaughter 10,000 additional shares of Commercial Investment Trust Corporation stock. She filed a gift tax return for 1941 in which she reported the gift of the 10,000 shares at a valuation of 28 1/8 per share. On the date of the gift 1,500 shares of the Commercial Investment Trust Corporation stock were sold on the New York Stock Exchange at prices ranging from 30 1/2 to 29 3/4 per share. Respondent used the median of these two prices (30 1/8) as the value of the shares in determining the amount of the gift in his deficiency notice for 1941.
The Commercial Investment Trust Corporation is engaged principally in the business of financing purchases of automobiles, refrigerators, and other appliances. Its shares are listed on the New York Stock Exchange. At December 31, 1941, it had outstanding 3,485,228 shares of common stock which were owned by more than 14,000 stockholders. A little less than half of those shares were held by 56 stockholders who held more than 7,500 shares each. Those stockholders consisted mostly of the officers and directors of the corporation and their relatives, holding companies, investment trusts, banks and other institutions. The company paid a 150 percent stock dividend in 1929.
The financial condition of the company in 1941 was excellent. The book value of the shares at December 31, 1941, was $32.73 per share and only slightly less at the close of the preceding calendar year. The principal part of its assets consisted of cash and domestic notes and accounts receivable. The dividends paid on its outstanding shares amounted to $4.96 for 1936, $5 for 1937, and $4 for the next four years, including 1941. The daily sales of the stock on the New York Stock Exchange over the period July 21 to August 22, 1941, amounted to from 100 to 5,000 shares. The average number of shares sold daily over that period was a little less than 900. The sale price ranged from a high of 33 1/4 on July 21 to a low of 27 7/8 on August 12. During the week ended Friday, August 8, 1941, 3,700 shares were sold at prices ranging from 31 to 29 3/4. On August 5, 1941, 1,500 shares were sold at prices ranging from 30 1/2 to 29 3/4.
The fair market value of the 10,000 shares which petitioner transferred to the trust on August 5, 1941, was 30 1/8 per share.
OPINION.
SMITH, Judge:
Our first question is whether the gifts in trust in 1933 and 1935 were gifts of future interests. The determination of the amount of the net gifts for the prior years is a necessary step , under section 502, Internal Revenue Code, in computing the gift tax liability for 1941. See Margaret A. C. Riter, 3 T.C. 301.
The respondent has determined that the 1933 and 1935 gifts were gifts of future interests and in computing the net taxable gifts for 1941 he has added back to the net gifts made in the preceding years the $5,000 exclusions claimed and erroneously allowed‘ in respect of the 1933 and 1935 gifts.
As to both the 1933 and 1935 gifts, the trust agreement provided for the accumulation of the surplus income, over the amount required for the donee's education and support, until the donee should attain the age of 21 years. Thereafter, the income is all to be paid to the donee for life. However, if the donee should die before attaining the age of 21, leaving no children surviving, the principal of the trust, and presumably the accumulated income, will go to the donee's mother, if living, or, if not, to the mother's descendants. Thus, until the granddaughter attains the age of 21 or until her earlier death it can not be determined who will ultimately receive the accumulated income or the principal. In the meantime and during the minority of the granddaughter it is left to the discretion first of her mother, then her father, and then the trustees, to say how much of the income shall be used for her support and education and how much accumulated.
We think that the gifts to the granddaughter were gifts of future interests, as that term has been defined by the Supreme Court in United States v. Pelzer, 312 U.S. 399. The only material difference between the facts in the instant case and those in the Pelzer case is that here the trustees were authorized during the minority of the granddaughter to use as much of the income as might be required for her education, etc., and accumulate the balance, whereas in the Pelzer case all of the income was to be accumulated for the beneficiaries for 10 years and then paid to those who were living and 21 years of age. The Court said that:
* * * Here the beneficiaries had no right to the present enjoyment of the corpus or of the income and unless they survive the ten-year period they will never receive any part of either. The ‘use, possession or enjoyment‘ of each donee is thus postponed to the happening of a future uncertain event. The gift thus involved the difficulties of determining the ‘number of eventual donees and the value of their respective gifts‘ which it was the purpose of the statute to avoid.
It has been held in a number of cases that a gift which is to be made in the discretion of the trustee is a gift of a future interest. Welch v. Paine, 130 Fed.(2d) 990; Winston Paul, 46 B.T.A. 920; Lillian Seeligson Winterbotham, 46 B.T.A. 972; Mary M. Hutchings, 1 T.C. 692; affd., Hutchings-Sealy Nat. Bank v. Commissioner, 141 Fed.(2d) 422; Estate of W. W. Fondren, 1 T.C. 1036; affd. (C.C.A., 5th Cir.), 141 Fed.(2d) 419. The distributions and accumulations were to be made at the discretion of the trustees in the 1935 trust and in the discretion of the donee's mother or father or trustees in the 1933 trust.
Even if we assume that there were gifts of present interests in respect of the income of the trusts which was to be applied to the education and support of the granddaughter during her minority, we have no evidence whatever as to how much of the income was intended to be applied or was actually applied for such purposes, and on the evidence of record it would be impossible to place any value on such interests. See Margaret A. C. Riter, supra. We do not know anything about the probable requirements of the donee for education and support or anything about the financial affairs of her father, who was legally responsible for her support and education.
As to the accumulated income and principal which the donee was to receive at some future time, provided she survived the appointed date, the gifts were clearly gifts of future interests. United States v. Pelzer, supra.
In the recently decided case of Disston v. Commissioner, 144 Fed.(2d) 115, the Circuit Court of Appeals for the Third Circuit held, overruling its earlier case of Commissioner v. Taylor, 122 Fed.(2d) 714, and reversing a memorandum opinion of this Court, that transfers in trust for the benefit of the settlor's minor children were not gifts of future interests. In the Disston case the trustees were directed to apply as much of the income as might be necessary for the education, comfort, and support of the minor children and to accumulate the balance and pay it over to them when they attained the age of 21 years. The court said that the gifts to the minor children were ‘immediate, definite, absolute and irrevocable,‘ and that:
* * * In no respect did they depend upon the happening of an uncertain future event either for the determination of the donees or the quantum of the gifts. It seems plain, therefore, that the gifts did not constitute transfers of future interests.
The court further said:
The provision for the accumulation of income affected neither the identity of the minor donees nor the value of the gifts. At most, the provision was but compliant recognition by the donor of what the law, out of its solicitude for the safeguarding of a minor's property, would have interposed in the absence of the donor's express direction in such regard. The gifts were the property of the minor donees none the less; and so was the income which recurrently accrued thereon even though it was to be accumulated during the donee's minority. No one else had any interest in or to the gift or the income therefrom. Nor could any interest therein be acquired by anyone else except through the donees. If the donees should die during their minority, the gifts and all accumulated income would pass as part of their respective estates. The use and enjoyment of the gifts were the minors' from the day the gifts were made. The accumulated income inured alone to their benefit. Furthermore, for the purpose of determining the recipients of the gifts, the possession of the corpus was in the minor donees within the contemplation of the relevant provision of the Revenue Act. See Helvering v. Hutchings, 312 U.S. 393, 396, where the Supreme Court said that ‘the beneficiary of the trust to whose benefit the surrender (by the donor) inures * * * is the 'person’ or 'individual' to whom the gift is made.‘ In the test laid down by Art. 11 of Regulation 79 for determining a future interest, the terms, ‘use, possession or enjoyment‘, are used disjunctively. A present possession of an absolute and irrevocable gift is not, therefore, to be submerged by a supposed lack of use or enjoyment which, in turn, rests upon no more than that the income is accumulated for the minor beneficiary during his minority rather than paid directly into his hands.
The only material difference between the facts in the instant case and those in the Disston case is that in the instant case the accumulated income was to go to the granddaughter or her heirs or legatees only in the event that she should attain the age of 21 or should die earlier, leaving children surviving her, while in the Disston case the accumulated income and principal was to pass as a part of the children's estates even if they should die during their minority. We are not certain that that difference affords sufficient grounds for distinguishing the cases, but, if not, then we must respectfully disagree with the position taken by the court for the reason that we believe it contrary to a great number of decisions of this Court as well as of the Circuit Courts of Appeals. See cases cited, supra, to which might be added the following cases: Helvering v. Blair, 121 Fed.(2d) 945; Commissioner v. Brandegee, 123 Fed.(2d) 58; Pauline Wilkens Tidemann, 1 T.C. 968.
It will be noted that in reaching its conclusion in the Disston case the court found it necessary to overrule its own decision in the Taylor case, in which it had reversed this Court. The views of the majority of the court in the Disston case seem in substantial accord with those expressed by Judge Waller in his dissenting opinions in Fondren v. Commissioner, supra, and Hutchings-Sealy Nat. Bank v. Commissioner, supra.
The reasons advanced in the Disston case for holding the transfers gifts of present interests are in part at least those that would seem to bear more directly upon the question of whether the gifts were vested and absolute, or whether they were contingent or conditional. As we construe the statute, a gift may be absolute in every respect and yet be a gift of a future interest because its use and enjoyment are postponed to some time in the future. This we think is the rationale of United States v. Pelzer, supra. Certainly as to the principal and the income that was to be accumulated, and we can not even approximate the amount to be accumulated, the use and enjoyment, as well as the possession, by the donees, are to be postponed until a future year and the gift was therefore a gift of a future interest. See dissenting opinion of Judge Biggs in the Disston case.
Petitioner makes the argument that under the laws of the State of New York accumulations of trust income for the benefit of a minor can be made only for the period of the beneficiary's minority and that the accumulations of a ‘discretionary application‘ trust belong to the minor at all times.
Conceding that this may be true, the question of whether a gift is of a present or of a future interest, within the meaning of the Federal statute, is not one that is controlled by state law. A like contention was made by the taxpayer in the Pelzer case, supra, but was rejected by the Supreme Court in the following words:
* * * Respondent (the taxpayer), relying on statutes and judicial decisions of Alabama, where the trust was created and is being administered, insists that the gifts to the named grandchildren are present not future interests as defined by Alabama law. He argues that as Sec. 504(b) does not define the ‘future interests‘ gifts of which are excluded from its benefits, they must be taken to be future interests as defined by the local law, and it is the local law definition of future interests which must be adopted in applying the section. But as we have often had occasion to point out, the revenue laws are to be construed in the light of their general purpose to establish a nationwide scheme of taxation uniform in its application. Hence their provisions are not to be taken as subject to state control or limitation unless the language or necessary implication of the section involved makes its application dependent on state law. * * *
Petitioner contends in the alternative that if it should be determined that the 1933 and 1935 gifts were of future interests, the values thereof were not as reported, $98,218.75 and $670,000 respectively, but were $44,825.76 and $324,030.76, respectively. The lesser amounts are the estimated present worth of the right to receive the gifts at the future dates when they shall become wholly subject to the use and enjoyment of the donee or donees.
This contention, we think, is without merit. The statute provides (sec. 1005, Internal Revenue Code; sec. 506, Revenue Act of 1932) that ‘if the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.‘ Thus, gifts of a future interest are valued in the same manner as those of a present interest. There is no authority in the statute for discounting a gift of a future interest by reducing it to present worth. In Helvering v. Blair, supra, the court assumed that the gift of a life interest presently created was a present gift, the value of which might be computed actuarily, but pointed out that because the trustees there had the discretionary power to change the division among the beneficiaries the present interests could not be valued by any known actuarial method.
We think that the value of the gifts was the value of the property transferred on the date that the gifts were made.
The remaining question for consideration is the value for gift tax purposes of 10,000 shares of Commercial Investment Trust Corporation stock transferred by the petitioner to the trust created in 1935 on August 5, 1941. These shares were returned for gift tax purposes at a price of 28 1/8. The evidence shows that 1,500 shares of the stock of this company, which were listed on the New York Stock Exchange, were sold on the date of the gift, August 5, 1941, at prices ranging from 30 1/2 down to 29 3/4. The respondent held, in accordance with his regulations, that the median between the high and low on the date of sale represented the fair market value of the shares for gift tax purposes. (See Regulations 108, sec. 86.19). The petitioner argues that the fair market value of a block of 10,000 shares on the date of the gift was not the median of the prices at which the shares sold on the stock exchange on that date, but was several points less. On brief he contends that the shares should be valued at a price not in excess of $26 per share. This is based upon the testimony of an expert witness.
The theory of the petitioner is that large blocks of shares of stock which are the subject of a gift should be valued at less than small lots of the stock which admittedly would bring approximately the quoted price. This and other courts have held in numerous cases that quoted prices for shares of stock do not necessarily reflect the value of a large block of stock even for gift tax purposes. See Henry F. duPont, 2 T.C. 246; Helvering v. Maytag, 125 Fed. (2d) 55; Sewell L. Avery, 3 T.C. 963, and cases cited therein. It does not necessarily follow, however, that, because a large block of shares can not be sold on the stock exchange at the quoted price at the date of gift or within a reasonable time thereafter, such valuation does not reflect value for gift tax purposes. The quoted price of a listed stock is the point at which demand and supply meet so far as a lot of 100 shares is concerned. It is nevertheless true that the quotation price of a listed stock is the best approximation of the market value of all the shares listed. In the absence of any showing that the market is fictitious, it would seem to indicate the fair market value of a large block of shares as well as of a small block.
In the instant case we are not limited to quotations alone for the determination of value. There have been submitted in evidence the volume of trading and quotations for a considerable period of time and also the balance sheets of the Commercial Investment Trust Corporation at the close of 1940 and 1941, as well as the dividend record, etc. From these balance sheets it is noted that the book value of the shares at the close of 1941 was $32.73 per share and only slightly less at the close of the preceding year; also, that most of the assets are current assets. It further appears that, for a period of more than three years prior to the date of the gift, dividends at the rate of $4 per share were paid upon the stock and that during 1940 the stock sold as high as 56 per share and during 1941 as high as 37 7/8 per share.
From a consideration of the entire evidence, we are of the opinion that the determination of the respondent, that the fair market value of the 10,000 shares which were the subject of the gift on August 5, 1941, was 30 1/8 per share, was not in excess of the true value.
Decision will be entered under Rule 50.